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Juliette Declercq, the founder of JDI Research, considers Powell’s 25bps cut last week as a precious bullet that missed its target. She agrees with Trump that Powell fails to understand domestic forces at work and consequently wrongly aimed at the demand-side of the economy rather than the supply-side. The former is essentially consumer sentiment, driven by absolute levels of employment and compensation rather than year-on-year changes – it’s therefore relatively insensitive to the end of the business cycle. The supply-side (business and CEO confidence) portrays the opposite behaviour, being driven by earnings growth and necessity to deliver on valuation levels. The two indicators are diverging, forcing the Central Banks to bridge the gap through the provision of cheap borrowing (Fig.1). Declercq also explains the importance of the interest rate ‘impulse’ driving economic activity, rather than the interest level itself. The Fed must deliver on rate cut promises that the market has already consumed. She also claims that the ongoing global slowdown is due to a lack of dollar liquidity worldwide. The Fed had the capacity to turn the dollar around last week but instead drove it to 2-year highs. Despite these developments, Declercq believes recent dollar strength is still, ultimately, unsustainable.
Why does this matter? Whether a supporter or a critic of the Fed rate cuts, it’s worrying to hear that Powell might be getting the big picture wrong. This could be, of course, politically driven, but is important to keep in mind for incoming monetary decisions.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)